Tax cheats provoke judge’s ire

October 23, 2016

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Sometimes the judge just says it all. Such was the situation when Judge Posner wrote the opinion for the 7th Circuit Court of Appeals in the case of Thomas v. UBS.

In this case, a number of wealthy individuals had attempted to avoid U.S. income taxes by taking advantage of the Swiss bank secrecy laws. After UBS turned over information about their accounts to the IRS, the group filed a class action suit against the bank.

In dismissing the suit, Judge Posner did not mince words concerning his feelings about the plaintiffs:

The plaintiffs and the other members of the class – who number in the thousands – are American citizens who had bank accounts in UBS in 2008 when the UBS tax evasion scandal (of which more shortly) broke. The accounts of the three plaintiffs were large – $500,000 to $2 million each. The plaintiffs had not disclosed the existence of the accounts on their federal income tax returns, as they were required to do. … They also did not disclose the income they earned in those accounts. Neither did they pay federal income tax on that income, though it was taxable. Eventually they ‘fessed up and paid the taxes they owed plus interest on those taxes and a 20% penalty. They did this pursuant to an IRS amnesty program, adopted in the wake of the scandal. … The suit seeks to recover from UBS the penalties, interest, and other costs that the plaintiffs and the other members of the class incurred from their scrape with the IRS, plus the profits (in the hundreds of millions of dollars) they claim UBS made from the class as a result of the fraud and other wrongful acts that they allege UBS committed by inducing them to maintain their accounts with it.

The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS. One might have expected the plaintiffs to try to show that they had forgotten they had accounts with UBS (though that would be preposterous, for these were significant investments for each of the plaintiffs). Or that UBS had told them that income earned in those accounts was somehow tax exempt and moreover that the accounts themselves were somehow not foreign bank accounts within the meaning of the tax code and so the plaintiffs didn”t have to acknowledge having accounts with UBS. They don’t make any of these feeble arguments. They do argue, as we’ll see, that UBS was obligated to give them accurate tax advice and failed to do so, but not that it gave them inaccurate, as distinct from no, advice.

There are grounds for avoiding penalties for admitted violations of federal tax law, … such as reliance on plausible advice from a reputable-seeming lawyer or accountant. But the plaintiffs do not invoke any of those grounds or argue that they asked UBS to advise them on U.S. tax law or that the bank volunteered such advice.

What’s true is that in 2009 UBS admitted having helped tens of thousands of its clients to evade U.S. income taxes, and paid a $780 million fine. … Maybe this help included tax advice, but our plaintiffs do not argue that they (or other members of the class) received tax advice from UBS. They argue rather that the bank should have prevented them from violating the law. This is like suing one’s parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties. There is in general no common law duty to prevent another person from violating the law.

We needn’t discuss the plaintiffs’ remaining claims – of negligence and malpractice – as they are frivolous squared. This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.

“What at first was plunder assumed the softer name of revenue.“ – Thomas Paine